SEC allows BlackRock funds to borrow funds from one another

The move will help it improve its liquidity position with customers.

Officials from the U.S. Securities and Exchange Commission have stated in a notice that portfolio managers of BlackRock Inc. will be allowed to borrow money from one another in case they are pressed for money to lend to their clients.

The notice states that they could borrow upto one third of their total assets or upto 10% of their assets without their collateral by routing all such transactions through BlackRock’s “InterFund Program.”

In 2015, the world’s largest asset manager had asked the regulator to allow it to borrow cash from one another in order to meet hypothetical spikes in requests by clients to redeem shares.

Although other companies could provide the funds for lending, which includes Fidelity Investments and the Vanguard Group, BlackRock’s request comes in the wake of regulators putting the liquidity position of mutual funds under the loop.

In late 2015, Third Avenue Management liquidated nearly $1 billion Focused Credit Fund, as its junk-bond investments sank.

“Interfund loans will not prevent another mess, they will make it tougher to sort out the mess,” said Erik Gordon, a professor at the University of Michigan Ross School of Business.

Last year, the SEC had proposed a requirement which stated that U.S. funds must have better planning procedures in place so as to ensure liquidity. The proposals have yet to be finalized.

“No question about it: Liquidity risk management is high on the regulators’ agenda,” said David Tittsworth, a longtime specialist in fund management, now at law firm Ropes & Gray LLP in Washington.

The law requires that mutual funds honour redemption requests within seven days of their presentation. Although the SEC has put up guidelines to cap investments in hard to sell securities at 15%, this is not legally required.

In addition to transferring funds from one another, funds could also be routed through the interfund account to fund loans so as to help tide themselves over, in case the piping that supports trade settlement and cash delivery fails, said BlackRock.

“Interfund lending exemptive relief is commonly granted by the SEC to mutual fund complexes,” said Tara McDonnell, BlackRock’s spokeswoman.

With almost $5 trillion assets under management, BlackRock has already arranged for outside funds to be arranged during stressful times.


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